Already Reeling, Detroit Flails In Latest Effort to Reinvent Itself

Published: September 16, 2006

Detroit is running low on optimism.

Despite insisting all this year that they had solutions to their financial struggles well in hand, both the Ford Motor Company and the Chrysler Group conceded Friday that the steps they had taken were not working and that more bad news was coming in one of the deepest auto industry crises in Detroit's history.

Ford, which has held second place behind G.M. for 70 years, admitted for the first time that it would inevitably be ceding that spot to Toyota because of slumping sales and its decision Friday to close more factories and cut thousands of additional jobs. It also said it did not expect to make a profit in North America until 2009.

At the same time, the Chrysler Group, also pummeled by the decline in sales of big sport utility vehicles and pickup trucks, said it would report a loss for this summer of $1.5 billion, more than double what it had originally anticipated.

Its parent, DaimlerChrysler, also signaled that it did not see how to build a subcompact car profitably in North America, forcing it to turn to China or another Asian carmaker to help build one overseas. [Page B4.]

For its part, G.M., which is cutting 30,000 jobs and closing nearly a dozen plants, is set to decide within a month whether it wanted to link with a Japanese and a French auto company, a prospect that has rattled union members as well as state officials where G.M. employees live and work.

With all of the auto companies here putting themselves on the chopping block, the upheaval shows that Detroit's basic business strategy -- built on the assumption that what has long been thought of as the Big Three would make money simply by dominating the mass market with a full range of vehicles -- is irrevocably broken, said James P. Womack, who has written extensively about the auto industry.

''All the old rules of the game are gone,'' said Mr. Womack, co-founder of the Lean Enterprise Institute. And, he said, the challenge is now to play by the new rules, as dictated by foreign competitors. ''We're now in the reinvention phase,'' he added.

That includes more cuts that will continue at least through the end of the decade. Detroit companies will be focused on closing plants, eliminating blue- and white-collar jobs, and cutting more deeply into their operations to reduce costs. Moreover, the automakers remain liable for billions of dollars in health care costs, both for their active and retired workers.

At G.M., those costs add up to $5.2 billion a year, or the equivalent of $1,440 a car. But for all their efforts to lose excess weight, the biggest challenge facing Detroit's car companies is convincing skeptical American buyers that their vehicles, developed amid this chaos, are as attractive as those from their aggressive rivals. Thus far, they have been failing, reflected in their falling market share in recent years.

Adding to Detroit's woes, its Asian competitors are investing billions of dollars more in American factories and hiring thousands more American workers.

Within six years, it is likely that Asian auto companies, led by Toyota, will outsell their Detroit rivals in the United States, according to a forecast by Edmunds.com, a Web site that offers car-buying advice.

The industry has already gotten a look at the lineup of the future. This July, the best-selling companies were G.M., Toyota, Ford, Honda and Chrysler. And what seemed to be a temporary aberration is about to become the norm, said Jesse Toprak, a senior analyst at Edmunds. ''It was a sneak peek of what's likely to happen going forward,'' Mr. Toprak said.

That was not what Ford's chairman, William Clay Ford Jr., was envisioning in January, when Ford unveiled the first phase of a restructuring plan that it calls the Way Forward.

Amid an announcement that it would cut 34,000 jobs and close 14 plants, Mr. Ford vowed that the 103-year-old company, founded by his great-grandfather, Henry Ford, would regain its supremacy in the American market.

''With it, we will retake the American road,'' Mr. Ford said at the time.

But Friday, Mr. Ford signaled that his company was allowing Toyota to pass it. At the end of the news release that announced new cuts, including the elimination of 10,000 more salaried jobs, Ford said it expected its share of the market to drop to 14 to 15 percent after this year, 10 points lower than Ford was at the beginning of the decade.

At that time, bets were placed across Detroit whether Ford could surpass G.M.; now, the safe bet is that Toyota will pass Ford to become No. 2 behind G.M., something Mr. Toprak expects to happen for good next year.

But given the unpredictability of gasoline prices, to have any kind of security in the American market, both Ford and Chrysler will have to reduce their dependence on sport utilities and pickups, which make up two-thirds of Ford's lineup and three-quarters of the vehicles sold by Chrysler. Both vow they will do that by selling more cars and crossover vehicles.